Opening the Takaful market

The appeal of Islamic finance and Takaful insurance is growing globally, with particular success in emerging markets. But is Takaful finally ready to take off in the UK?

While UK Takaful providers have tended to stall or fail to date, many experts maintain that the specialist market can gain traction in this country.

Commentators argue that there is much to be gained by the London market in harnessing its skills and expertise to offer Takaful services. As far as the UK market is concerned, while there is some conviction that a relevant Takaful market exists, attempts to tap into it have proved ill-fated.

Most recently, GNL Insurance, a Shariah-compliant broker that launched in London in July 2011, has ceased trading. GNL Insurance - the trading name of Gatehouse Napier - was part of a joint venture between Gatehouse Bank and Lloyd's insurance broker Paul Napier.

A spokesman for Paul Napier said: "Gatehouse Napier Limited ceased trading on 14 December 2011. Paul Napier Limited did, and still does, own 50.002% of the shares in GNL."

However, there continues to be a certain level of interest, with developments in the pipeline. Ffion Flockhart, partner at law firm Norton Rose, hints at a forthcoming initiative.

"We are currently involved in a potentially exciting development which, if successful, would be a game changer for the Takaful market in the UK," she says.

No plain sailing
Also, plans appear to still be in progress for Lord Mohamed Sheikh's Takaful insurance business Iqra Ethical. The firm was registered at Companies House more than two years ago and Lord Sheikh told Post in December: "We want to make sure that what we do is fully compliant. The structure has to be right and the staff properly trained."

Setting up a Takaful service is unlikely to be plain sailing. Mahesh Mistry, associate director for analytics at AM Best, identifies a number of challenges facing Takaful companies in the UK.

In particular, he says: "For start-up operations, the companies will need to generate sufficient business volumes, to achieve economies of scale and drive expenses down to an adequate level.

"In addition, the company will need to target a specific market segment, or compete with large players, who may be aggressive on price, and operating on thinner margins."

Takaful players are likely to be concentrated on personal lines, where competition can be fierce and market conditions less conducive to an unknown market player.

While experts agree that price and the need to raise awareness about Takaful products are key concerns, the issue that tends to divide opinion among industry commentators is that of demand.

Richard Bishop is an independent consultant on Takaful insurance. He believes there is a not a sufficiently large target market in the UK to make the provision of Takaful products economically viable.

For Bishop, an additional problem is a lack of awareness that an alternative to conventional insurance exists. There is a view, though, that Takaful products can be marketed to a wider audience, and that the Shariah-compliant element is not necessarily the only differentiator.

Susan Dingwall, a partner at Norton Rose, explains: "Takaful should not be viewed simply as a niche product for Muslims. It is an ethical product and it should be promoted to a wider market segment as a ‘green' product, where the investments made from donations [premiums] are invested ethically."

Ethical insurance
Mohammad Khan, head of Islamic finance at PwC, suggests there is a place in the UK market for an ethical insurance product that is also Shariah-compliant. He adds that if this could be offered at the same price as a conventional product, it would make a very compelling commercial argument.

Khan believes that marketing a product in this way means that the target audience is less restricted. He explains that while there should be a demand for this type of product in the UK, it is unlikely to become a reality any time soon.

"Would I hope that in the next three to eight years we would see something that offers ethical insurance that happens to be Shariah-compliant? Yes. But my view is that it would not happen immediately because economically we are in such uncertain times," he says.

In order to harness demand for the product, it is widely agreed that it is vital to educate and raise awareness. As Flockhart says: "The main issue is to educate potential insureds about the nature of Takaful and its potential benefits. This education needs to transcend communities."

James Smith, executive director of financial services at Ernst & Young, adds: "Education of the target client base through effective marketing will be essential. But this may not be sufficient to convert a highly price-sensitive market to Takaful products."

Price will inevitably be a key concern for those considering a UK Takaful offering. Bishop believes that it is particularly difficult to create a business case for the sale of personal lines Takaful products.

"You have to consider the cost of the Shariah compliance on top of the Financial Services Authority compliance, combined with a society that is highly price sensitive. It is only the most devout who will pay the extra cost, thus restricting the target market further," he comments.

Smith agrees that price is a significant issue. He explains: "Globally, Takaful is focused predominantly on the retail market. Here in the UK, the retail market for general insurance is one of the most price competitive in the world and profitability is a challenge for even the most established insurers.

"It appears that the majority of target customers for a general Takaful operator are already price-sensitive buyers of conventional motor and household products and unwilling to pay a premium for a Shariah-compliant offering."

Smith adds that, as a result, achieving profitable growth is extremely challenging. Industry experts also point to issues regarding the need for a Shariah supervisory board (see below).

Companies would need to ensure, for example, that investment strategies and products are Shariah-compliant and meet the supervisory board's approval. This means they are subject to an additional level of supervision.

Despite the challenges for companies looking to set up a Takaful offering, the good news is that they are likely to find a supportive regulatory environment.

Dingwall comments: "The FSA has repeatedly said that Takaful is treated in precisely the same way as conventional insurance and so both are regulated in the same way.

"The fact that the FSA already has experience of authorising a Takaful operator benefits those who wish to set up a Takaful operation in the UK."

In fact, Dingwall describes the UK as a "very receptive jurisdiction for Takaful products". She explains: "Successive governments have stated that the UK should be the centre for Islamic finance and that there should be a level playing field for conventional and Islamic finance. The same approach is also adopted with respect to Islamic insurance."

Skills and expertise
Commentators tend to be positive about the skills and expertise available to establish a Takaful product in the UK.

Peregrine Towneley, chairman of JLT Group's Middle East and North Africa initiative, says: "There are technical requirements which are well known and well documented.

"In the same way that there are a myriad of lawyers who don't have to be Catholic to understand the way the Vatican legal system works, there are plenty of western lawyers who understand how Shariah law works."

And, according to Smith: "There is an abundance of insurance expertise here in the UK, including senior practitioners that have worked in Takaful operations in the Middle East and South East Asia. More junior staff may require training in terminology and product features."

But he adds: "The absence of a UK Takaful industry means there is little demand for such skills currently."

While commentators disagree about the prospects for establishing a Takaful market in the UK, there is a consensus when it comes to the UK and the London market potentially providing Takaful products overseas.

Bishop explains: "The question now, in terms of opportunity, is whether London wants to provide Shariah-compliant capacity to the world's Islamic institutions."

It certainly seems that Takaful is going from strength to strength outside the UK. In fact, Ernst & Young's World Takaful Report 2012: Industry Growth and Preparing for Regulatory Change, confirms that global Takaful contributions grew by 19% to $8.3bn (£5.2bn) in 2010.

The question is whether UK-based providers will be able to sell Takaful products and services outside the UK.

Towneley responds: "We're all very price-driven when we buy services that we don't particularly want to buy. So if Takaful providers have a product that people want to buy and they price it more competitively, complying with all the Takaful elements, then I see no reason why not."

He adds: "If providers had a product they could sell at a price people would buy it at, with a margin they could make money on, it would be no different for Takaful than any other business model."

Again, the argument returns to expertise and resources in the UK. Khan explains: "If you wanted to establish a Takaful or re-Takaful product, you'd need the broader infrastructure, like relevantly skilled accountants, actuaries, lawyers and so on.

"You'd also need insurers that understand the insurance risk. And, in the UK, one of the advantages we've got is that there is a coming together of all this infrastructure and expertise."

Succeeding in London
Bishop believes there is potential for London to succeed in the Takaful space by providing its services to large corporates and on speciality risks, rather than on personal lines or SME commercial business.

He adds: "What London can provide is capacity and expertise. If you look at where many London market insurers have created new operations, it tends to be in emerging markets like the Middle East and Far East. So they are currently doing it in a conventional way. There is now an opportunity to do it in an Islamic way."

A strong sense remains that a market does exist for the right Takaful products in the UK. In the mean time, the message is that UK insurers would do well to tap into the growing demand for Takaful services in other parts of the world.

As Bishop concludes: "As long as the right structures are in place, and there is an understanding that you make investment returns in a different way to that of a conventional insurer, there is nothing to stop London being a major centre of Islamic insurance."

Q&A: Shariah supervisory boards
Colin Gleeson, director of the corporate finance insurance practice at Deloitte, answers some key questions on the role of the Shariah supervisory board for Takaful providers.

Do all insurance companies offering Takaful products need to have a Shariah supervisory board in place?
To be Shariah-compliant, they need to have a board. This is a constituted, permanent board. It isn't the same as a board of directors. It has an Islamic remit as opposed to a wider organisational and business remit. So, it will depend to some degree on the nature and complexity of the business how often they will meet. For a relatively simple, small business, there will typically be a smaller number of scholars and they will meet less often.

Could you briefly summarise the function or purpose of a Shariah supervisory board in the context of Takaful insurance?
Effectively, a Shariah board is constituted to supervise anything related to the Islamic side of the business. So, product construction, investments and, in general, how the business conducts itself so that it is compliant with the underlying rules of Shariah law.

What does a typical Shariah supervisory board look like?
It varies but, more often, it comprises between three and six members. Bigger organisations will have more. If you look at larger Islamic finance institutions, they might have boards of six, seven or eight, while smaller ones, partly because boards are expensive to run, will have fewer. In terms of who they are - they are scholars. They don't all have to be but, in practice, most of them are. There are relatively few scholars who have both the financial and the Shariah skills to perform this role, so they are a reasonably scarce commodity in the context of a growing industry.